A PROJECT REPORT

ON
Risk Management in Punjab National Bank for Working
Capital and Term Loan
At
Punjab National Bank
(Submitted toward partial fulfillment of the requirements for the
award of the Post Graduate in Management 2013-15)

Submitted by:
Anik
(Roll No: 221020)
FMG XXII
Under the Guidance of
Mr. Anil Jhanji
Manager (Credit)
PNB C.O. Kapurthala

&
Prof. Neeti Shikha
Internal Project Guide

FORE School of Management, New Delhi

B-18, Qutab Institutional Area,
New Delhi

CERTIFICATE

This is to certify that Mr. Anik, Roll No. 221020, has completed his summer
internship at PNB, and has submitted this project report entitled (Risk
Management in Punjab National Bank for Working Capital and Term Loan)

towards partial fulfillment of the requirements for the award of the Post
Graduate Diploma in Management (FMG-22) 2013-2015.

This Report is the result of his own work and to the best of my knowledge no
part of it has earlier comprised any other report, monograph, dissertation or
book. This project was carried out under my overall supervision.

Date:

Place:

___________________
Internal Faculty Guide
(Prof. Neeti Shikha)

ACKNOWLEDGEMENT
Behind every fruitful endeavor lies the advice, guidance and inspiration of all
the people directly or indirectly involved with the report. I wish to express my
gratitude to all the people involved in the completion of this report. I am
thankful to all of them for their help and encouragement throughout the
completion of the report. They have been a constant source of support for
me.

I would like to extend my sincere gratitude to the management of PNB for

providing me the enriching opportunity of working with the organization for a
period of 2 months. In particular, I would like to thank my Company Guide,
Mr. Anil Jhanji, for sparing the time to provide me with necessary guidance
and advice from time to time, with utmost patience, in spite of their extremely
busy schedule. I would also like to express my sincere gratitude to Mr.
Sanjeev Sharma and Mr. Rajesh Verma for sparing their time to provide me
with necessary guidance and many helpful comments.
My heartfelt gratitude and warm salutations are also due to Prof. Neeti
Shikha, my Internal Faculty Guide, the faculty of our Institute, for inculcating
in me the principles of dedication and hard work, and proving their guidance
and support throughout the Project.
Their constructive criticism of the approach to the problem and the result
obtained during the course of this work has helped me to a great extent in
bringing work to its present shape.

ANIK

Table of Content
EXECUTIVE SUMMARY........................................................1
1. INTRODUCTION..............................................................2
1.1
1.2
1.3
1.4
1.5

Background.......................................................................2
Banking Industry at a Glance.............................................2
Structure of Indian Banking Industry..................................4
Company Profile................................................................5
Objective of the Project.....................................................7

2. LITERATURE REVIEW......................................................8
3. METHODOLOGY OF THE STUDY.....................................12

3.1 Universe of the Study......................................................12

3.2
3.3
3.4
3.5

Locale of the Study..........................................................12

Sample Selection.............................................................12
Data Collection................................................................13
Analysis of Data..............................................................14

4. ANALYSIS....................................................................15

4.1 Sources of risks considered in the model..........................16

4.2 Usage of the credit risk rating model................................18
4.3 Important factors considered in the rating process of the
clients..................................................................................20
4.4 Special considerations in case of unavailability of data for
clients..................................................................................21
4.5 Parameters considered in the PNBs Credit Risk Model......24
4.5.1 Financial Strength Of The Clients...............................................24
4.5.2 Business Performance Of The Clients.........................................24
4.5.3 Industry Outlook Of The Clients.................................................24
4.5.4 Management Evaluation Of The Clients.....................................24
4.5.5 Conduct Of Account...................................................................25
4.6 Assessment of the Parameters of the Model......................25
4.6.1 Assessment of financial strength...............................................25
4.6.2 Assessment of business performance........................................29
4.6.3 Assessment of Industry Outlook of the Client............................31
4.6.4 Assessment of Management Quality of the Client......................31
4.6.5 Assement of Conduct of Account of the Client...........................33
4.7 Comparison Of The Model With The Industry Standard......34
4.8 Review Of The Model Based On Basel-III Norms.................35
4.9 Review Of The Model Based On RBI Guidelines..................38

5. RESULTS AND RECOMMENDATIONS...............................40

5.1 Major Findings................................................................40

5.2 Recommendations...........................................................41
5.3 Further Scope Of The Study.............................................42

6. LIMITATIONS................................................................43
7. REFERENCES...............................................................44
ANNEXURES....................................................................45
List of Figure

Figure 1 Structure of the Indian Banking Industry..............................................................4

Figure 2: Hierarchical Structure of the Organization...........................................................6
Figure 3: Types of Risks....................................................................................................... 15
Figure 4: CRAR in PNB........................................................................................................ 36
Figure 5: Capital and NPA Levels for PNB..........................................................................37

List of Table

Table 1: Credit Risk Rating Entity Model............................................................................17

Table 2: Weightage of Parameters in the Model.................................................................19
Table 3: Risk Rating Classification......................................................................................20
Table 4: Achievement of Sales Targets by the Management.............................................32

EXECUTIVE SUMMARY
This project report titled Risk Management in Punjab National Bank for Working
Capital and Term Loans is concerned with the study of the techniques and procedures
followed by Punjab National Bank for determining and sanctioning the working capital
limits and term loan credits.

The study is related to the review of the existing Credit Risk Model being implemented
in PNB for the credit services. Various secondary data sources such as research
papers, journals and online web portals have been used to arrive at benchmark data
for analysis of the model. The RBI monitors the Credit Risk Models for all the banks in
India and also provides guidelines for the bank to maintain their procedures.

The study helps to understand the working of the Credit Risk Model of PNB in detail
and also the various parameters it uses to rate a client/project. The model being
discussed analyses the financial, operational, historical and industrial aspects of the
business/project of the client. The analysis of the model is also done by comparing it
with the industry benchmarks, and reviewing the compliance with the Basel-III and RBI
norms.

Various proposals and the general procedures followed at the bank were closely
observed and the conclusions, thus, drawn upon.

1. INTRODUCTION

1.1 Background
In India, the definition of the business of banking has been given in the Banking
Regulation Act, (BR Act), 1949. According to Section 5(c) of the BR Act, 'a banking
company is a company which transacts the business of banking in India.' Further,
Section 5(b) of the BR Act defines banking as, 'accepting, for the purpose of lending or
investment, of deposits of money from the public, repayable on demand or otherwise,
and withdrawable, by cheque, draft, and order or otherwise.'
Banking is the business of providing financial services to consumers, The basic
services a bank provides are saving account, Time deposit, Loans that consumers can
use to purchase goods and services and basic cash management services such as
foreign currency exchange.

1.2 Banking Industry at a Glance

The commercial banking industry in India started in 1786 with the establishment of the
Bank of Bengal in Calcutta. The Indian Government at the time established three
Presidency banks, viz., the Bank of Bengal (established in 1809), the Bank of Bombay
(established in 1840) and the Bank of Madras (established in 1843). In 1921, the three
Presidency banks were amalgamated to form the Imperial Bank of India, which took up
the role of a commercial bank, a bankers' bank and a banker to the Government. The
Imperial Bank of India was established with mainly European shareholders. It was only
with the establishment of Reserve Bank of India (RBI) as the central bank of the
country in 1935, that the quasi-central banking role of the Imperial Bank of India came
to an end.

To better align the banking system to the needs of planning and economic policy, it was
considered necessary to have social control over banks. In 1969, 14 of the major
private sector banks were nationalized. This was an important milestone in the history
of Indian banking. This was followed by the nationalization of another six private banks
in 1980. With the nationalization of these banks, the major segment of the banking
sector came under the control of the Government. The nationalization of banks
imparted major impetus to branch expansion in un-banked rural and semi-urban areas,
which in turn resulted in huge deposit mobilization, thereby giving boost to the overall
savings rate of the economy. It also resulted in scaling up of lending to agriculture and
its allied sectors. However, this arrangement also saw some weaknesses like reduced
bank profitability, weak capital bases, and banks getting burdened with large nonperforming assets.
To create a strong and competitive banking system, a number of reform measures
were initiated in early 1990s. The thrust of the reforms was on increasing operational
efficiency, strengthening supervision over banks, creating competitive conditions and
developing technological and institutional infrastructure. These measures led to the
improvement in the financial health, soundness and efficiency of the banking system.
One important feature of the reforms of the 1990s was that the entry of new private
sector banks was permitted. Following this decision, new banks such as ICICI Bank,
HDFC Bank, IDBI Bank and UTI Bank were set up.

1.3 Structure of Indian Banking Industry

The Reserve Bank of India (RBI) is the central banking and monetary authority of India,
and also acts as the regulator and supervisor of commercial banks.

Scheduled banks comprise scheduled commercial banks and scheduled co-operative

banks. Scheduled commercial banks form the bedrock of the Indian financial system,
currently accounting for more than three-fourths of all financial institutions' assets.
SCBs are present throughout India, and their branches, having grown more than fourfold in the last 40 years now number more than 80,500 across the country (see Table
1.1). Our focus in this module will be only on the scheduled commercial banks. A

pictorial representation of the structure of SCBs in India is given in figure

Figure 1 Structure of the Indian Banking Industry

1.4 Company Profile

Punjab National Bank (PNB) was established in 1894 and is the second largest
government owned and over all fourth largest bank in India. It has about 5800
branches across 764 cities and serves over 80 million customers. It has presence
throughout the country and offers a wide variety of banking services that include
corporate and personal banking, industrial finance, agricultural finance, financing of
trade and international banking. Among the clients of the bank are multinational
companies, Indian conglomerates, medium and small industrial units, exporters and
non-resident Indians. The strength of the bank lies in its corporate belief of growth and
stability.

Vision: "To be a Leading Global Bank with Pan India footprints and become a
household brand in the Indo-Gangetic Plains providing entire range of financial
products and services under one roof"
Mission: "Banking for the unbanked"

Figure 2: Hierarchical Structure of the Organization

1.5 Objective of the Project

The objective of this project is to study in depth the credit appraisal procedure followed
by PUNJAB NATIONAL BANK, which includes

Understanding the different types of credit facilities and credit delivery

mechanisms provided to industrial customers viz. Overdraft, Cash Credit,

Drawing Rights, Fund Based Credit, Non Fund Based Credit etc.
Understanding the different methods available for risk vetting of lending
proposals, different risk assessment models and the different credit rating

procedures used in Punjab National Bank.

Understanding the appraisal process of Term Loan and working Capital
financing and sanctioning of working capital, issuing term loan, to corporate,

through different case studies, on the job training.

Assessing the qualitative factors which influence the decision making of lending
to a particular client apart from theoretical parameters.

2. LITERATURE REVIEW
According to Mann and Srivastava, the fast changing financial environment

exposes the banks to various types of risk. The concept of risk and
management are core of financial enterprise. The financial sector especially the
banking industry in most emerging economies including India is passing through
a process of change. Rising global competition, increasing deregulation,
introduction of innovative products and delivery channels have pushed risk
management to the forefront of today's financial landscape. Ability to gauge the
risks and take appropriate position will be the key to success.
Jain, Mukul in his research paper titled A Critical Review of Basel-III norms
implementation in Indian Banks explains that the banking operations worldwide have
undergone phenomenal changes in the last two decades since 1990s. The financial
crisis episodes surfaced since 2006 have highlighted this paradox to a number of
central banks operating in different countries and RBI and Indian banking sector is no
exception to this phenomenon. The global Basel-III requirements, which require all
banks to hold top-quality capital equal to 7% of their assets, adjusted for risk, are
aimed at improving financial stability. But the sharply higher capital requirements have
drawn warnings from analysts and financiers about their impact on banking lending
rates and wider economic growth across the developing world. Buchelt and
Unteregger feel that long before the advent of Basel II, financial institutions had put in
place various control mechanisms and procedures. The process of managing
operational risk is different from those of managing market risk and credit risk only in
so far as operational risk is different from the other two kinds of risk.

Kaiser and Kohne argue that the distinctive feature of operational risk may cause
significant divergence of the individual steps of operational risk management from the
corresponding steps of market and credit risk management. Kingsley state the
following objectives of operational risk management: avoiding catastrophic losses,
generating a broader understanding of operational risk issues, enabling the firm to
anticipate risk more effectively, providing objective performance measurement,
changing behavior to reduce operational risk, providing objective information so that
services offered by the firm take account of operational risk, ensuring that adequate
due diligence is shown when carrying out mergers and acquisitions. All of these
objectives, it seems, fall under the headings, risk avoidance and risk reduction but
operational risk management is more than that as it encompasses risk transfer and
risk financing.
Raghavan, R.S in his research has found out that there are various key factors that
must be considered for a credit risk model for Indian banks. According to him, the
banks must adopt a disciplined way of looking at Credit Risk and estimation of the
overall health status of an account captured under Portfolio approach as contrasted to
stand-alone or asset based credit management. Impact of a new loan asset on the
portfolio can be assessed. Taking a fresh exposure to the sector in which there already
exists sizable exposure may simply increase the portfolio risk although specific unit
level risk is negligible/minimal. He stresses on the need for relationship managers in
banks to capture, monitor and control the over all exposure to high value customers on
real time basis to focus attention on vital few so that trivial many do not take much of
valuable time and efforts and that rating should be used for the anticipatory
provisioning.

Tarashev and Zhu used a standard portfolio credit risk model to estimate links between
capital and the probability of bank default, which is treated as a signal for a systemic
banking crisis. They interpret the banking system as a portfolio of banks and estimate
the loss distribution arising from bank defaults. They concluded that bank failures are
correlated and the correlations can be estimated from market information.
In a master circular issued by RBI to all the banks in India, it has drafted a certain set
of guidelines that the banks must strictly follow in accordance with the Basel-III
instructions adjusted by RBI. Saran, Prashant summarizes these guidelines that the
banks can outsource the financial services done by them to external companies but
necessary safeguards to address the risks inherent in such a case should be put in
place.
According to the RBIs journal and guidelines on Risk Management in banks, the broad
parameters of risk management function should encompass an organisational
structure, comprehensive risk measurement approach, risk management policies
approved by the Board, guidelines and other parameters used to govern risk taking
including detailed structure of prudential limits, strong MIS for reporting, monitoring
and controlling risks, well laid out procedures, effective control and comprehensive risk
reporting framework, separate risk management framework independent of operational
Departments and with clear delineation of levels of responsibility for management of
risk and periodical review and evaluation.

3. METHODOLOGY OF THE STUDY

Methodology is description of the process, rules, methods employed in a study.
Research in common parlance refers to a search for knowledge. One can also define
research as a scientific and systematic search for pertinent information on a specific
topic. In fact, research is an art of scientific investigation. This chapter deals with
universe of the study, locale of the study, method of data collection, tools used for
data collection, types of sampling used, sample sized used for study and analysis of
the study.

3.1 Universe of the Study

The universe of the study consists of all the employees of the organization (Punjab
National Bank).

3.2 Locale of the Study

The locale of the study has been narrowed down to the PNB, Circle Office Kapurthala
(Punjab). The study is categorized into the credit department of PNB. The office
receieved a number of proposals for Working Capital Limits and Term Loans on daily
basis. So the researcher decided to take up these proposals for analysis purpose. The
findings may or may not be similar to the other branches of the company.

3.3 Sample Selection

The sampling of study has been done as per convenience sampling. A convenience
sample is a sample where the samples are selected, in part or in whole, at the

convenience of the researcher. The researcher makes no attempt, or only a limited

attempt, to insure that this sample is an accurate representation of some larger
group or population. Owing to time constraint and being a learning experience the
research was narrowed down to 20 samples out of average number of 70 proposals
received per month so that an in depth analysis can be carried out.

3.4 Data Collection

For the purpose of data collection, two different sources were adopted for the study:

Primary Sources

Secondary Sources

The primary data collection method has been used to complete the research activity.
But the researcher has done secondary research study also.

Primary - For this study the researcher has considered the proposals and the observed
the procedures that were followed for the same. Various documents were taken from
the company to complete the analysis. The management was interviewed for
clarifications, wherever required. The researcher also consulted the manuals and
guidelines provided by PNB.

Secondary - The researcher has gathered material from various risk management
related research papers and journals. The official website of PNB, RBI and other web
portals on financial topics were also studied to understand the process.

3.5 Analysis of Data

The gathered data has been analyzed to draw inferences and finding for this research
study on Cedit Risk Management for Working Capital and Term Loan and evaluate the
feasibility and the soundness of the model under discussion.
For the research study, 20 proposals were shortlisted such that it covers a number of
situtations that are/are not covered by the existing model that PNB follows. The
proposals were then assessed based on the parameters defined under the model of
the bank. The staff working on the cases and the authorized officials were consulted
for the cases that could not be arrived on a conclusion under standard parameters of
the model. The data gathered from Literature review was used in the comparison of
the current model in use by PNB with the industry requirements from the same.

4. ANALYSIS
The credit risk rating model has been developed with a view to provide a standard
system for assigning a credit risk rating to the borrowers of the bank according to their
risk profile. This model is applicable to all large corporate borrowal accounts availing

total limits (fund based and non-fund based) of more than Rs. 15 crore or having total
sales of more than Rs. 100 crore.
Inputs to the model are the financial data of the borrower, industry information and the
evaluation of the borrower on various objective and subjective parameters.
The model evaluates the credit risk rating of a borrower on a scale of AAA to D with
AAA indicating minimum risk and D indicating maximum risk. The credit risk-rating
model incorporates and includes possible factors of risk for determining the credit
rating of the borrower. These risks could be internal and specific to the company, the
industry in which the company is operating or the entire economy and can influence
the repayment capacity and / or willingness of the company.

Figure 3: Types of Risks

4.1 Sources of risks considered in the model

Signals for credit risks can be picked up from a number of sources. The credit riskrating model considers the following broad areas in evaluating the default risk of a
borrower:
Financials
Quality of Management
Business Performance
Conduct of Account
Industry Outlook
The rating model is focused on the above-mentioned areas for assessing the credit
risk rating of a company. The areas are bifurcated into sub-areas and each sub-area is
further split into a number of parameters. The sub-areas as well as parameters used in
the different sections have been explained in detail in the following part of the report.
There are various models adopted for different projects and accounts which are
categorized and briefly explained below:

Credit Risk Applicability

Rating Model

Total Limits from our Sales

Bank

Sector

Large Corporate Above Rs. 15 Crore Above Rs.100 Crore

OR

Manufacturing and
Service

Mid Corporate

Above Rs. 5 Cr and up Above Rs. 25 Cr. and

Manufacturing,
to Rs. 15 Cr. OR
Up to Rs.100 Cr. for Service and
manufacturing and service
industry and irrespective Trading
of limit in case of trading
activities.

Small Loans

Above Rs.50.00 lakh Up to Rs.25 Cr.

and Up to Rs.5 Crores
AND

All sectors except NBFC/

Banks/FIs

Small Loans II

Above Rs. 2 lakhs & up Up to Rs.25 Cr.

to Rs. 50 lakh AND

All sectors except NBFC/

Banks/FIs

NBFC

All Non Banking Financial Companies irrespective of Limit

New Projects

Above Rs. 5 Cr
OR

Entrepreneur
New Business

Half
Review
Rating

Cost of
Rs.15Cr.

Project

above All
sectors,
except
NBFC/Banks/FIs
and
trading up to two years of
operations.

Borrower setting up Cost of project up to Rs. All

sectors,
except
new
business
and 15 cr.
NBFC/Banks/FIs. However,
requiring finance above
all new trading business
Rs. 20 lakh and up to
irrespective of limits shall be
Rs. 5 cr. AND
rated under this model.

Yearly Applicable to all listed companies as well as all accounts having exposure from our
of bank (Fund Based+Non Fund Based) of above Rs. 50 crore

Counter Party

All banks and Financial Institutions

Table 1: Credit Risk Rating Entity Model

As shown in the Table above, the bank considers different business clients as different
type of entities based on a certain criteria. These parameters are explained as follows:

Large Corporates: The clients who have net sales of over Rs. 100 crore are
categorized in this class. This class is qualified to avail limits of more than Rs.
15 crore from the bank. This class generally has clients from Manufacturing and

Service sectors.
Mid Corporates: The clients who have net sales between Rs 25 crore and Rs
100 crore are categorized as Mid Corporates. This class is qualified for limits
between Rs 5 crore and Rs 15 crore. This class generally has clients from

Manufacturing, Trading and Service sectors.

Small Loans-I: The firms that have sales upto Rs 25 crore can be classified as
Small Loans-I clients. These can avail limits ranging from Rs 50 lakh to Rs 5

crore. This class is applicable to all the sectors except NBFC/Bank/FIs.

Small Loans-II: The firms that have sales upto Rs 25 crore can be classified as
Small Loans-II. These can avail limits ranging from Rs 2 lakh to Rs 50 lakh from

the bank. This class is applicable to all the sectors except NBFC/Bank/FIs.
NBFC: There is no limit to this category in terms of sales or limits. This category

is specially reserved for Non Banking Financial Companies (NBFC).

New Projects: This class has clients that have cost of project more than Rs 15
crore. A limit of over Rs 5 crore can be availed by these firms. All sectors are
applicable in this class except NBFC/Banks/FIs and trading firms for the first

two years of operations.

Entrepreneur New Business: The new projects that cost less than Rs 15 crore
qualify for this class. Funding of the project that can be availed by the bank lies

between Rs 20 Lakh and Rs 5 crore.

Counter Party: All banks and financial Institutions

4.2 Usage of the credit risk rating model

The following text describes the basic rating procedure followed when implementing
the rating model for a client.
1. The scores are assigned to each of the parameters in the different sections on a
scale of 0 to 4 up to two decimal points with 0 being very poor and 4 being
excellent. The scoring of some of these parameters is subjective while for some
others it is done on the basis of pre-defined objective criteria.
Wherever a particular parameter is not applicable, no score should be given.
The parameter should be made NA so that the weight assigned to that
parameter gets distributed among the other parameters in that section
automatically.

2. The scores given to the individual parameters multiplied by allocated weights

are aggregated and a composite score for the company is arrived at in
percentage terms. Weights have been assigned to different parameters based
on their importance.
The following table shows the various parameters and the weights assigned to
them:

S No.
1
2
3
4

Factor
Financial
Business / Industry
Management
Conduct of Account
Total

Weight Assigned
40
20
20
20
100

Table 2: Weightage of Parameters in the Model

3. The overall percentage score obtained from step 2 on a scale of 0 to 100 is then
translated into a rating on a scale from AAA to D according to a pre-defined
range as under:

Rating
category

Risk
Profile
(Description)

Score (%) obtained

Grade within the

rating category

PNB AAA

Minimum Risk

Above 80.00

PNB- AAA

PNB-AA

Marginal Risk

Above 77.50 up to 80.00

PNB- AA+

Above 72.50 up to 77.50

PNB- AA

Above 70.00 up to 72.50

PNB- AA-

Above 67.50 up to 70.00

PNB- A+

Above 62.50 up to 67.50

PNB- A

Above 60.00 up to 62.50

PNB- A-

Above 57.50 up to 60.00

PNB- BB+

Above 52.50 up to 57.50

PNB- BB

Above 50.00 up to 52.50

PNB- BB-

Above 47.50 up to 50.00

PNB- B+

Above 42.50 up to 47.50

PNB- B

Above 40.00 up to 42.50

PNB- B-

PNB-A

PNB-BB

PNB-B

Modest Risk

Average Risk

Marginally
Acceptable Risk

PNB-C

High Risk

Above 30.00 up to 40.00

PNB- C

PNB-D

Caution Risk

30.00 and below

PNB- D

Table 3: Risk Rating Classification

4.3 Important factors considered in the rating process of the clients

The rating model contains several qualitative parameters that are to be evaluated
subjectively. It is, therefore, necessary to be adequately familiar with the company and
the industry. Visiting the company and interacting with its management generally helps
the rater in understanding the underlying activity behind the financial data of the
company being analysed; the business prospect of the company and its management.
Information should be collected about the company from all possible sources to
conduct this exercise completely, accurately and in an authenticated manner.

The data used to rate companies should be annualised & made comparable before it
is used for rating purposes. Similarly the financials of the company should be made
comparable with peers in case of change in accounting policies, merger, demerger,
acquisition, sell-off etc.

While evaluating a company against the industry the following points should be kept in
mind:

The companys value should be compared only with peers.

Size / capacity / volume are indicative factors in selecting peers.

The sample of companies chosen for the industry comparison should be

identical as far as possible for rating all companies under one particular industry
having similar size / capacity / nature of activity.

The number of companies in sample should be reasonable i.e. neither too low
nor too high.

The sample size should be of at least 5 companies. The sample should

preferably be selected from the activities in which company is operating.

4.4 Special considerations in case of unavailability of data for clients

For companies where industry data is not available, data for other comparable
industries can be used. For example, blade-manufacturing companies can be
compared with combined sample of companies manufacturing blade and other
shaving products etc. Similarly Hindustan Aeronautics Ltd. may be compared with
other heavy engineering companies, which also uses intensive technologies and have
a similar size, say in terms of sales turnover.
For multi-divisional companies, which are involved in more than one industry,
evaluation should be done separately for each business. Thus the management
evaluation, conduct of account and financial evaluation will be done on a common
basis. For the business section, each business should be evaluated and scored
separately, taking into account the different industries involved. A weighted average of
these business scores should be calculated, where the weights are proportional to the
contribution of each business to the companys total sales. This weighted average
should then be combined with the scores in the other sections to arrive at the overall
rating for the company.
The credit risk rating exercise should be done immediately after receipt of audited
financial results of the company and should be delinked invariably from the regular
renewal exercise. The updating of the credit ratings should be undertaken normally at
quarterly intervals or at least at half-yearly intervals, operationalising of Preventive
Monitoring System (PMS) will be an aid in this regard.
In case latest data of peers is not available for industry comparison, then last available
data, not more than one year old, may be considered.

For companies, which have not been banking with PNB earlier, the score obtained
excluding conduct of account should be scaled up to 100 and the rating assigned
accordingly, as the PMS score will not be available.
The Credit Policy and Risk Management Department (CPRMD), Head Office will provide the
industry score to be used for all major industries, progressively. Until such time the industry
score may be assigned as 50%.

4.5 Parameters considered in the PNBs Credit Risk Model

4.5.1 Parameter 1: Financial Strength Of The Clients
The financials of a company are indicative of the health of the company and potential
risks in lending to the company e.g. if the company already has a large amount of debt
on its balance sheet, compared to its cash flow generation capacity, a loan to this
company would be risky.
4.5.2 Parameter 2: Business Performance Of The Clients
The business performance of a company has a direct relationship with the credit risk of
the company as the business performance determines the generation of cash for debt
repayment.
The companys competence in its activities as well as its position relative to its
competitors are key indicators of how a company is expected to perform and its ability
to generate funds to repay its debts.
4.5.3 Parameter 3: Industry Outlook Of The Clients

The credit rating of a company cannot be assessed without considering the outlook of
the industry in which the company is operating. Industry performance very often has a
direct bearing on the performance of a company. Two companies in different industries
would have different credit worthiness depending on the outlook for their industries.
4.5.4 Parameter 4: Management Evaluation Of The Clients
The quality of management and management structure are very important indicators of
a companys credit risk. The performance of a company driven by a strong
management is likely to be better than that of a company having a poor management
irrespective of the industry to which it belongs.
Evaluation of management is important not only due to its impact on the companys
performance, which determines its capability to repay, but also from the point of view
of its integrity. This is because the intentions of the management determine the
willingness of the company to repay its debts.
The management quality thus influences both aspects of default risk, the ability as well
as the willingness of the borrower to repay its debts. Thus the evaluation of
management quality is an essential input for credit risk assessment.
4.5.5 Parameter 5: Conduct Of Account
The conduct of account refers to as to how the borrowers existing accounts with our
Bank as also with other banks are being conducted and whether any problems are
being faced. The conduct of account provides useful indications about the ability and
willingness of the borrower to meet his obligations. The manner in which a borrower

has been conducting his accounts in the past is a good indicator of how the account is
likely to behave in future as well.

4.6 Assessment of the Parameters of the Model

4.6.1 Assessment of financial strength
The financial strength of a company may be assessed by critically analysing the past
financial performance, its trend and expected future performance. This analysis help in
predicting the potential risk involved. These parameters are taken normally from the
annual financial statements of the company i.e. Balance Sheet, Profit

& Loss

Statement and the Cash Flow statement. Past performance is taken as a guide to
realistically assess future performance.
Besides, it is essential to determine the quality of these financial statements as to what
extent these can be accepted at face value.

Further, the trends in financial

performance over the past few years also indicate how the companys performance
has been changing over the past few years.
The financials are evaluated under four broad areas as under:

1. Past financial performance

While credit risk rating is done to evaluate the ability of a company to repay its debts in
future, evaluation of past financials is very important as it reflects the present financial
health of a company, which is a good indicator of how a company is expected to
perform in future.
The past performance is evaluated on the basis of figures given in the financial
statements of the company as well as industry data. Some of the parameters are

evaluated against absolute benchmarks while some are judged in comparison to

peers. In respect of certain parameters percentage growth of the company over the
past few years are compared while in respect of certain parameters, the ratios derived
from the previous years financial reports are compared. The evaluation of each of the
individual parameters is explained in detail in the following pages.
2. Future risk expectations
The expectation of future financial risk is an important input to the credit rating
process. This is used to evaluate the cash flows of a company as well as any major
risks, which the company might be facing in future that may adversely impact its
financial performance.
The evaluation of future risk expectations is a subjective matter based on the
assessment of the companys future performance. These expectations are based on
the performance of the company in the past as well as its plans for the future. The
contingent liabilities of the company, the Foreign Transaction Risk and the cash flow
adequacy etc. are considered in this section.

3. Subjective assessment of quality of financial figures

The assessment of the financial figures of a company is very essential to determine
the extent of reliability of the figures given in the financial statements of a company.
Companies often resort to tactics meant to distort the figures in the financial
statements such as adjustments in depreciation method, income recognition,
capitalisation of interest/expenses, pricing of inventory etc. Hence there is a need to

assess the extent to which the figures given in the balance sheet are reliable and how
transparent the accounts of the company are.
Further, the actual realisable value for these assets may also be different from that
given in the balance sheet. These aspects are to be taken into consideration while
evaluating the financials of a company.

4. Trends in financial performance over the past few years

The assessment of past financials relies on figures for the previous year. The pattern
of change over the previous years is an important indicator of the companys future
performance. The evaluation of trends in respect of certain identified parameters is
done using the figures given in the financial statements of the company. The
evaluation of these parameters takes into account the direction & magnitude of
changes over the past years.
Within these areas, parameters are defined to determine the companys position on
each of these areas. Scores are assigned to the parameters within these areas and
they are combined to arrive at a score for each of the above areas. The scores for
these areas are then combined according to the weights assigned to different areas to
arrive at the cumulative financial score.
The subjective assessment of financials as well as trends in financial performance is
used to adjust the score obtained under past financials.

Past financial performance

The assessment of past financial performance is done on the following parameters

and each of them is assigned a different weightage in order to arrive at a cumulative
rating for the past performance.

Gross Sales Growth Rate

OPBDIT
Short Term Borrowings
Operating Cash flow
Net Cash Flow

Debt-Equity ratio
Total Net Worth
Current Ratio
Interest Coverage Ratio
DSCR

4.6.2 Assessment of business performance

The performance of a company is influenced both by its own set up as well as its
competitive position within the industry. Thus the two broad sub-areas used to assess
the business performance of a company are:
1. Operating Efficiency
2. Market Position
Within these areas parameters are defined separately for manufacturing and service
sectors. The parameters defined for Service Sector and detailed guidance for
evaluating these parameters are given under Section 4.5. Scores are assigned to the
parameters within these areas and they are combined to arrive at a score for each of
the above areas. The scores for these areas are then aggregated according to the
weights assigned to different areas to arrive at the cumulative score for the company
on business performance.
1. Operating Efficiency of the Client
This covers the operations of a company and how efficient it is at performing its core
activities and takes care of aspects like the asset utilisation of the company, its working
capital management, cost effectiveness of operations etc. These factors play an

important role in determining the business performance of a company and thus are
evaluated for determining the business performance.
The evaluation of the parameters under this area is done on an objective basis using
the figures in the financial statements of the company. Within these, some parameters
might require a subjective assessment and have to interpret from the financial
statements. This would be applicable specifically to parameters like Credit Period
Availed and Credit Period Allowed. e.g. if credit period availed is very high as obtained
from the financial statements, then it could be due to a very good reputation of
company in the market, or because the company is not paying its suppliers in time.
Thus an interpretation of these figures will have to be made to decide what score is to
be assigned.
There are various parameters on which the evaluation is done but the most important
parameters out of these will be selected and scores assigned to them. The selection of
these parameters may be made on the basis of its relevance in a particular industry &
these will be decided by the Credit Systems and Tools Team and updated from time to
time as needed.
2. Market Position of the Client
The business performance of a company is not governed simply by its own operations
but also by the competition in the industry as well as the companys position vis--vis
its competitors. This also covers risks related to buyers, suppliers and technology used
by the company. An evaluation of the parameters helps in determining how well the
company is placed to compete in the market and how efficient its operations are. It
also reflects how fluctuations in the market and developments in the industry would
influence the operations of the company.

The parameters that would be used for evaluating the market position of a company
would vary from industry to industry. Also, within these parameters, assignment of
scores would require a large number of sub-parameters to be considered. The Credit
Systems & Tools Team in association with the industry specialist teams would decide
these parameters and sub-parameters for different industries.
The rater assigns scores to the individual sub-parameters, which would then lead to a
final score for the parameters, after combination of weightage assigned to the
individual sub-parameter. Assignment of scores to the parameters/sub-parameters will
be subjective.
4.6.3 Assessment of Industry Outlook of the Client
The industry rating is used to adjust the score obtained by a company on business
performance. The rationale for this is that a company belonging to an industry that
score highly on industry rating would be in a better position to strengthen its business
position. Conversely a company belonging to an industry with a poor industry outlook
would have adverse impact on its business position.
Good performers are given greater benefit and penalised less for the industry outlook
because they would be in a better position to exploit the opportunities in the industry
as well as protect against the uncertainties in the industry.
The Credit Policy and Risk Management Department (CPRMD) provide the industry
score to be used for all major industries, progressively. Until such time the industry
score may be assigned as 50%.
4.6.4 Assessment of Management Quality of the Client

Evaluation of management is done to determine both their competence as well as their

integrity.
The two sub-areas considered for this purpose are:

Achievement of past targets by the company

Subjective assessment of management quality

Within these two sub-areas, parameters are defined which enable us to determine the
companys position on each of these sub-areas. Scores are assigned to the
parameters within these areas and they are combined to arrive at a score for each of
the above areas. The scores for these areas are then aggregated in accordance with
the weights assigned to different areas to arrive at the cumulative score for the
company on management quality.

1. Achievement of targets by the Client

The targets quoted by the company at the beginning of the year are used as the
benchmark with which the actual performance is compared. This gives an indication of
the managements ability to drive the company by properly gearing it to the
performance target set by them.
The actual results of the company are compared to the targets that had been set by
the company at the beginning of the year and the extent to which the targets have
been achieved is used to assign scores to the parameters.
Achievement of actual sales against estimated/projected sales

Score

< 75%

75% to 79%

80% to 89%

90% to 95%

> 95%

4
Table 4: Achievement of Sales Targets by the Management

2. Subjective assessment of the management of the client

The assessment of management on criteria like integrity, honesty, and track record is
assessed in this section. This area is important as this indicates both the quality as
well as integrity of management. Hence it is essential to be completely familiar with the
management of the company and its track record, organisation structure and reporting
relationships within the organisation as well as the qualifications of the top
management personnel.
4.6.5 Assement of Conduct of Account of the Client
The evaluation of the conduct of an account is done on the basis of its PMS Rank or
PMS Index Score (Maximum). The outlook and performance of an industry depend on
a number of parameters that include the structure of the industry as well as its
financials. Some of the broad parameters that are used for evaluating an industry are:
1. Expected industry growth rate
2. Capital market perception: The industry P/E ratio is a useful indicator in this regard
3. Regulatory framework

Tax Concessions

Tariff Protection

4. Demand-supply mismatch
5. Financial performance of industry

Return on capital employed

Price stability

Operating profit margins

Earning stability

6. Threat from globalisation

7. Structural attractiveness

Supplier power

Buyer power

Threat of product substitution

Threat of new entrants and entry barriers

Competition within the industry

4.7 Comparison Of The Model With The Industry Standard

The current Credit Risk Model of PNB can be compared to the Industry standard that
has been arrived at by the secondary research done through research papers. The
model used by PNB is evaluated on the basis of each of those parameters that are
considered important for a banks credit rating system as follows:

Disciplined way of looking at Credit Risk and estimation of the overall

health status of an account: The model has predefined sub parameters in
different sub areas that help the bank to evaluate a project on various different
areas that can affect the Credit Risk to the bank. The financial, management,

operation, industrial and historical data is all taken into consideration while

evaluating an account.
Assessment of impact of a new loan asset on the portfolio: The bank
follows strict guidelines that limit the funding of the projects. These limits are
prescribed as a percentage of the total funding available to the bank. This helps
the bank to limit the risk involved in its operations. This characteristic of the

model helps the bank to cover for the losses in case of defaults.
Sector wise Risk monitoring: The bank has operational poilicies in the credit
risk model that helps the bank to monitor its activites in a particular sector. This
helps the bank to limit the risk involved in case of changing traditions and

policies of the entire industry that might have an adverse effect.

Relationship managers for high value accounts: Bank does not have a
policy of appointing relationship managers for high value account. However,
bank has included a structure of approval of the projects such that the projects
are looked into by the different offices in terms of power and hierarchy. High
Value projects are generally handled by Regional or Zonal Offices while smaller

projects can be handled at the District Headquarter level or Branch Office level.
Rating procedures should be implemented: PNB has a rating system of the
clients set up in place that considers a number of parameters and subparameters to calculate the worthiness and risk quotient of the client. These
parameters are based on financial, environmental, internal, operational and
historical performance of the firms.

4.8 Review Of The Model Based On Basel-III Norms

Under Basel III the total capital a bank is required to hold is 8.0% of its risk-weighted
assets. Total capital is divided into two broad categories: Tier I capital and Tier II
capital.
Broadly speaking, Tier I capital is capital that is available to absorb losses on a "goingconcern" basis, or capital that can be depleted without placing the bank into
insolvency, administration or liquidation. Tier II capital is capital that can absorb losses
on a "gone-concern" basis, or capital that absorbs losses in insolvency prior to
depositors losing any money. Additional Tier I capital mainly consists of instruments
issued by the bank, which are able to meet specific criteria (and are not included in
Common Equit y Tier I capital). Basel III has introduced stricter criteria for determining
what constitutes Additional Tier I capital in order to ensure these instruments absorb
losses of a bank on a going- concern basis.
Basel III has also introduced a capital conservation buffer that requires an additional
2.5% of Common Equity Tier I capital to be held over and above the absolute minimum
requirements. This buffer is intended to be available to be deployed during periods of
stress. If the buffer falls below 2.5%, constraints on a bank's ability to distribute
earnings will be progressively applied on a sliding scale. The regulator has been given
authority to determine the level of the buffer according to its perception of the systemic
risk that has built up in the banking system as a result of excess credit growth.

12
10
8
Tier-I Capital %

Tier-II Capital %

4
2
0
2012.0

2013.0

Figure 4: CRAR in PNB

The graph shown above clearly shows that there has been consistent increase in tier I
capital (except 2011), which has not been supported by Tier II.

Figure 5: Capital and NPA Levels for PNB

As shown in graph above, at present the bank is satisfactory capital adequacy but Net
NPA has rose to almost 400% in past five years, which calls for additional provision. A
combined impact of this could adversely affect overall capital adequacy especially in
terms of Basel III. The Banks profit in the latest year has grown by about 10 %.
Government ownership is above 54 % and last Public Issue by the bank was brought
in 2005 so if needed bank can look for raising public equity.

4.9 Review Of The Model Based On RBI Guidelines

The model used by PNB for Credit Risk Mangement can be reviewed as per the RBI
guidelines and evaluated on those terms as follows:
1. Organisational structure: PNB has an organizational structure defined and set
up in place. Hierarchy and power distribution has clearly been defined on
individual as well as office terms.
2. Comprehensive risk measurement approach: PNB has developed and adopted
a risk management model that verifies the viability of the project to be funded
rigorously.
3. Risk management policies approved by the Board: The board of PNB has set
up its internal risk management policies in tandem with the guidelines set by the
RBI.
4. Strong MIS for reporting, monitoring and controlling risks: The Finacle from
Infosys has been implemented by PNB as their MIS which is used by them for

their services to their customers as well as for their internal functioning. PNB
also uses CIBIL to verify the reliability, history and background of the clients
before proceeding with their proposals.
5. Separate risk management framework independent of operational Departments:
PNB has set up in place their risk management model named TRAC that is
used for all the credit services offered by the bank.
6. Periodical review and evaluation: High value and large funded projects are
reviewed at least bi-annually and others at least annually to have an updated
information about the project and their credit status. This review helps PNB to
moderate the funding that it has provided to the project and to establish a check
on the credit risk it has from those projects.

5. RESULTS AND RECOMMENDATIONS

This chapter deals with the findings conclusions and suggestions of the report.
So that relevant facts does not get lost in heap of information generated during
the analysis and the interviews.

5.1 Major Findings

The major findings from the study can be listed as follows:

The Credit Risk Model of PNB is very well incorporated.

The Model follows RBI Guidelines and strictly adheres to the instructions issued
by RBI.

The Model is quite ready for RBIs milestone set for the PSU banks to comply

with the procedures as per Basel-III norms.

The model does not comply well with the Basel-III norms of maintaining the

ratios of Tier-I and Tier-II Capital

The financial status of the clients is a very important factor in determining the

funding limits and loans to the firms.

For new projects, viability of the projects is an essential factor in determining

whether the project should be funded or not.

For large corporate accounts, PMS rating and account history is the most

crucial factors along with the project viability.

The subjectivity in evalutating the parameters for a project provide the bank with
a provision to incorporate the reports made by Lending Engineers for the

projects.
The model also has a provision for including the reviews of external rating
agencies (CRISIL, ICRA etc.) in case of need of external verificaton.

5.2 Recommendations

Based on the analysis and the results arrived from the research, various
recommendation that can be made to enhance the existing model for PNB are:

Financial and operational performance of the company applying for loan should
be compared with its industry peers. Relative performance comparisons will not
only highlight the management capability but also help in identifying any
abnormalities in the information submitted by the company.

Compliance with Basel-III norms has to be met by 2018, as prescribed by the

RBI. The bank must be pro-active in developing and designing the policies to
meet the requirements and stabilize the Tier-I and Tier-II capital ratios.

Forward looking statements with respect to sales, profitability etc. provided in

the DPR and other reports submitted by the company should be treated with
caution. Market analysis, demand analysis, sales projections etc. should be
evaluated on with prevailing norms of the RBI.

If any of the critical ratios is marginally unfavorable, then additional collaterals

could be charged or pricing of the loan could be revised upward to compensate
for the additional risk

Due to increased activism and regulatory crisis like that with spectrum allocation,
mining leases, land acquisitions issues, environmental considerations etc.
viability of otherwise sound projects is threatened. Social, political and
economical risks should also be taken into consideration while deciding project
viability. Evaluation of these risks should be made mandatory in TEV report

Bank should be more stringent now as RBI has changed the norms for
restructuring of the accounts and the time period for declaration of a bad
account as NPA has also been shortened which will certainly effect the
performance of the bank.

5.3 Further Scope Of The Study

As it is known no study is an end in itself, scope exists for further exploration of the
study. So, more samples can be studied and an in-depth analysis can be carried out.
Due to time constraints study is restricted to credit risk management for working capital
and term loans and it can be extended to other areas as well.

The scope could be increased by taking projects of different industries and different
regions of India and evaluating them to enhance the visibility and efficiency of the
model.

6. LIMITATIONS

The data availability is proprietary, not readily shared for dissemination and is

highly confidential.
Due to non availability of data, peer comparision could not be done.
Constraints related to non-disclosure of the confidential data hindered the inclusion

in the study and thus, limiting the scope of the study.

Assumptions and projections are based on current market conditions and have not

taken into account the price volatility.

The staff although was very helpful but was not able to give much of its time due to

its own work constraints.

The study is being done keeping in mind the policies of the Head Office.
Due to the ongoing process of globalization and increasing competition, no single
model or method will suffice over a long period of time and constant up gradation
will be required.

7. REFERENCES

Kanchu, Thirupathi & Kumar, M. Manoj (2013) Risk Management in Indian

Banking Sector- An Empirical Study - International Journal of Marketing and

Finance
Arora, Swarnjeet (2013) Credit Risk Analysis in Indian Commercial Banks An

Investigation Asia-Pacific Finance and Accounting Review

Bhaskar, Patil Jaykar (2014) Credit Risk Management in Indian Banks

International Journal of Advance Research in Management Studies

ALShubiri, Faris Nasif (2011) The Effect of Working Capital Practices on Risk

Management Global Journal of Business Research

Jain, Mukul (2013) A Critical Review of Basel-III Norms for Indian PSU Banks
Balasubramaniam, C.S. (2011) Indian Banking and Basel Norms National

Monthly Refreed Journal of Research in Commerce & Management

http://www.ssrn.com/ accessed on May 17, 2014
http://pnbindia.com accessed on May 21, 2014
http://www.researchjournali.com/ accessed on May 21, 2014
http://jetems.scholarlinkresearch.com/ accessed on May 25, 2014
http://www.rbi.org.in/SCRIPTs/BS_ViewMasCirculardetails.aspx?id=8121

accessed on June 01, 2014

Risk Policy Manual, Punjab National Bank
Master Circular on Credit Risk Policies, Reserve bank of India
Instruction Manual on Loan, Punjab National Bank

ANNEXURES
ANNEXURE-I
CRAR for PNB:

The full document is available at:

http://pnbindia.in/new/Upload/English/Financials/PDFs/Disclosure_Basel_II_Pillar_3.pd
f
NPA LEVELS for PNB:

The full document is available at:

http://pnbindia.in/new/Upload/English/Financials/PDFs/Disclosure_Basel_II_Pillar_3.pd
f

ANNEXURE-II
Term Loans And Working Capital Limits Proposal Format:

Annexure-I

SANCTIONING AUTHORITY

MC

The

CMD ED

Others

proposal falls under the powers of GM/ED/CMD/MC on account of

____________________

Reference No. / Date :

1. Name of the Borrower and BO & Controlling Office :

Rs. In _________

GIST OF THE PROPOSAL

A. Sanction of Working Capital Limits

Existing

Proposed

FB
NFB

B. For Term Loan

Purpose
Cost of Project
Total Debt
Promoters contribution
Proposed TL (our share)
DER
Repayment Period
Door to door tenor

C. Approval of ROI/ Service charges as under:-

Facility

Existing

Proposed

Applicable

Income Earned

rate
Last Year

Current

year

upto_______
Intt.
Rate

of

interest

Intt.
CC
PC
TL

Processing
Fee
Upfront Fee
Lead Bank
Fee
Commission
on NFB
Other
charges, if

any

Non-

Intt.

NonIntt.

D. Approval of other Issues, if any :

Whether fresh/renewal/
enhancement
Asset
Classification
as
on________ and last PMS score
Credit Risk Rating by Bank
is --------- indicating ------------ risk
Rating from External Agency (The
external rating should be mapped to
the internal rating)

Rating Date of Score

Rating
Present
Previous
Facility
rated

Whether priority/non priority sector

as per PS&LB guidelines (Latest
being
PS&LB/LBC/Codified
Circular No. 11 dated 16.7.2011)
Sub-sector
may
also
be
mentioned.
Whether Agriculture/Retail/
SME/Others (Please specify)
a) Whether Sensitive Sector
Real Estate/Capital Market
b) Applicable Risk weight
Consortium/Multiple Banking
Lead Bank
PNBs Share %
Date of application
Date of receipt of proposal
- At BO/CO/HO
Date of clarifications, if any,
received at CO/HO
Date of submission of proposal
Remarks
Date of last sanction &
authority/In Principle Consent
Customer ID No.
Activity code (as per ladder)
PART I
2.

Borrowers Profile
a. Group Name
b. Address of Regd./Corporate Office
b. Works/Factory
c. Constitution and constitution code as per
ladder

Rating

Date of
rating

ABS

Rating
Agency

Reasons for
degradation
Remarks

d. Date of incorporation/
Establishment

e. Dealing with PNB since

f. Industry/Sector
g. Business Activity (Product)/
Installed Capacity.
3. Directors (S/Shri)
Name and
Designation

Address/Mobile No./e-mail
address of Main Directors/
Guarantor Directors/
Key persons

Whether Promoter/
Professional/Nominee

a) If any of them, in
the list of Caution Advices Yes/No
circulated by the Bank from time to
Details be furnished in case of
time/RBI's/Wilful defaulters' list/Caution List of
Yes
ECGC/
b) If any one of them connected in the past with any
NPA/OTS/Compromise/unscrupulous defaulters
c) If any of them, related to Directors/Senior Officers
of PNB:
d) i) Management Change since last sanction, if any
e) i)
Report on due diligence carried out in terms of
L&A Circular No. 170 dated 25.10.2008 and
comments on adverse features, if any.
ii) In case of multiple banking/consortium lending
Due diligence report on prescribed format as per
L&A Circular No. 24/09 and 139/09 has been
obtained
ii) Confirmation that CRs have been
compiled/reviewed as per extant guidelines
iii)
Confirmation that CRs have been drawn
from CIBIL Database and comments on adverse
features, if any
:
f) Share Holding Pattern as on:
Name of the Promoters/Major Share
No. of
holders
shares
Promoters Holding
FIs/ Mutual Funds/UTI/Banks/FIIs
NRIs/OCBs
Public
Total
g) Whether Shares pledged to any Bank/FI/others
If yes, Percentage of shares pledged
Institution
Purpose

Amt. in Rs.
Crores.

Yes/No

%
Holding

h) Brief history
Profile of the borrowing concern alongwith brief about the various divisions and their activities and
any other borrower specific major/significant features to be mentioned.
4.A Facilities Recommended :
Nature

(Rs. in Crore)
Existing

Fund Based

Proposed

Secured/Unsecured
along with
the basis thereof
(As per RBIs guidelines)

CC(H)
WCDL
FOBP/FOUBP/FABC
Others
Fund Based Ceiling
Non Fund Based
ILC/FLC
ILG/ FLG
Non Fund Based Ceiling
Term Loan
Limit of credit exposure on
account of all derivative
products
TOTAL COMMITMENT
4.B Our Commitment and Maximum Permissible Exposure Norms
Existing

Proposed

%age of Banks Capital Funds

as on 31.03.______

As per Exposure Norms

Amount

(%age)

Company
Group
4. C Short Term Loans sanctioned by PNB in last 12 months, if any
Date of sanction

Amount

Period

ROI

Date of
Adjustment

Roll over

4. D Details of facilities provided outside consortium including exposure on account of

derivatives, if any
Name
of
Institution

the

Nature
facility

of

Security

O/s
as on

Purpose

Rate
Interest

of

a)
b)

5.A

Facilities from PNB Subsidiaries/Exposure by way of investment in

Equity/Debentures/Derivatives/Foreign Exchange etc. :
(Rs. in Crore)
Name

of

the

Nature

of

Security

O/s

Purpose

Overdue,

if

Institution
a)
b)

facility

as on

any

5.B Term Loans from other Banks/Financial Institutions/Other Institutions - (including Lease,
ICDs, Corporate Loans, Debentures etc.)
(Rs. in Crore)
Name of the Bank/FI
Facility
Balance O/s
Overdue, if
Rate of
Sanctioned
As on
any
Interest
5.C Credit Rating by agencies {CRISIL/ICRA/CARE/FITCH INDIA} with purpose of such
rating.
Agency
Rating
Date of
Significance
Purpose
Validity
Rating
of Rating
Date
5D. Details of Working Capital Limits from the Consortium/Multiple Banking
Name of the
Bank

Existing
FB
NFB

Share %
FB
NFB

Proposed
FB
NFB

(Rs. in Crore)
Share %
ROI
FB
NFB

6. Details of Group /Allied/Associate firms and the facilities sanctioned to them along with
conduct of these accounts with our Bank/ other Banks and comments on adverse
indicators, if any.
As per Appendix II
7.A(i) Financial Position of the Company as on close of financial year for last three years
and estimated for last year and projected for the next year
(Rs. in Crore)
Two years
One year
Previous year (say
Projections
earlier
earlier
31.3.09)
for the
(say
(say
current year
31.3.07)
31.3.08)
(say 31.3.10)
Audited
Audited
Estimated
Audited
Gross Sales
- Domestic
- Export
% growth *
Net sales
(net of
excise duty etc.)
Other Income
Operating
Profit/Loss
*
Profit before tax
Profit after tax
Depreciation/
Amortization of
expenses
Cash profit/ (Loss) *
EBIDTA/PBIDTA
Paid up capital
Reserves and Surplus
excluding
revaluation reserves
Misc. expenditure not
written off
Accumulated losses *

Deferred Tax
Liability/Asset
a) Tangible Net Worth
b) Investment in allied
concerns and amount
of cross holdings
c) Net owned
funds/Adjusted TNW
(a b) *
Share application
money
Total Borrowings
Secured
Unsecured
Other investments
(excluding investment
in allied concerns
considered for arriving
at Net Owned Funds)
Total Assets
Current assets
Non current
assets
Out of which net fixed
assets
Net Working Capital *
Current Ratio
Debt Equity Ratio
Term liability/
Adjusted TNW
TOL/Adjusted TNW
Operating Profit/Sales
Long Term Sources
Long Term Uses
Surplus/ Deficit
Short Term Sources
Short Term Uses
Surplus/ Deficit **
* In case of negative growth/loss/erosion in TNW and NWC, the figures should be prefixed with
-ve sign.
* To match with NWC

7A (ii) Key Financials upto last quarter

(as per published Un-audited Results in case of listed companies)
Period
ended

Cumulative
position as on

Corresponding
position of

%
Accepted
Change for the

%age
achievement

(Rs. Crore)
Remarks

last
quarter/HY/Q3
ended

quarter/HY/Q3
of last year

Cumulative
position as on
last
quarter/HY/Q3
ended

Corresponding
position of
quarter/HY/Q3
of last year

current
year

upto latest
quarter/HY/Q3

Sales
Other
Income
Period
ended

%
Accepted
Change for the
current
year

%age
achievement
upto latest
quarter/HY/Q3

Remarks

PBT
PAT

7B. Brief discussion on Financial Indicators (Interpretation/inference drawn in

respect of Latest financial/ last FY indicators to be discussed)
(The financial parameters of the borrowing company may be discussed/commented upon
as mentioned hereunder. However, it is only an indicative list. The appraising authority
should also discuss parameters showing abnormal variation/trend and any other proposal
specific parameters.)
Paid up capital/TNW
(Details of authorised/issued/paid up capital alongwith share application money to be
given.)
Reconciliation of TNW
(Rs. in lacs)
TNW as on close of FY ended 31.3.2011
Add
Less
TNW as on close of FY ended 31.3.2012
(In case TNW is lower than the estimates or if there is fall in TNW, reasons for the same
should be duly incorporated. In case there is movement in paid up capital, reasons viz.
issue of fresh capital, issue of bonus shares, conversion of FCCB into equity, buy back of
shares, etc. should be mentioned. In case of issue of fresh capital, premium amount, if any,
IPO or private placements, should also be mentioned. There should be comment whether
the company is making provisions for redemption of FCCB on due date. Comments on
residual period of preference shares should be given.)
(In case of partnership/proprietorship firm, stipulation is to be made that the firm would
maintain the capital at the actual/estimated level during the currency of advance.)
Sales
(Actual sales should be compared to the sales of the last year/estimated sales (in actual

and percentage terms). The reasons for decrease in sales from last year/variations from the
estimated sales should be given. The current year estimates and its acceptability with due
justification should be mentioned. Justification for accepting the increase in sales, viz.
expansion, diversification, marketing strategies should be given.)
Other income
(The sources of other income should be mentioned and any variation from the estimates
should be commented upon. The income from the core activity vis-a-vis other income should
also be commented.)
Profitability
(Reasons for positive/negative movement in profitability of the borrowing company should
be given. Actual EBIDTA and net profit compared to the figures of last year/the estimated
figures should be commented upon. The current year estimates of net profit and its
acceptability with due justification should be mentioned.)
Investments
(Details and nature of investments including cross holdings, investment in
subsidiaries/group companies should be mentioned. The key financials parameters of the
companies in which the borrowing company has invested should be given.)
Diversion of funds
Details of use of funds for the purpose other than the one for which the sanction is accorded
alongwith the reasons and proposed action thereof
Current ratio/Debt Equity Ratio
(Reasons for movement and steps taken to improve the same be given.)
Balance Sheet analysis to be enclosed.
7C Capital Market Perception
Listing
Face Value
Current Share Price as on
52 weeks High / Low
Market Capitalisation as on
7.D

BSE/NSE

Details of investment in Shares, Debentures, Units or investment of funds outside the

business etc. (Along with comments in case of increase)

Particulars

No. of shares/
debentures/ units

Face
value

Market value, if
quoted

TOTAL
7.E

Details of Liabilities not accounted for/Contingent liabilities

Particulars

Amoun

Period (for likely devolvement

Invocation

Disputed taxes
Corporate guarantee
Bank guarantee
Pending court cases
Any other
Details of derivatives transactions

Remarks

Remarks

7.F Position of assessment of income tax/sales tax/wealth tax of the

concern/partners/proprietor/promoter directors/guarantors

borrowing

7.G

Information on litigation initiated by other banks/FIs against the borrower as per latest
Audited Balance Sheet, if any

7.H

Overall likely impact of (7.C to 7.G) on the financial position of the borrowing unit
8. SECURITY
A. Primary
i) For working capital limits
ii) For Term Loan
B. Collateral (Information in respect of mortgage of IP to be given only in the
following format:

i)

Hypothecation/ Mortgage of Block Assets Immovable Properties

(Rs. in Crore)

Security
Description

Area Ownership
in Sq
M or

Value

Last
sanction

Present
book
value

Sq Ft

Realisable
value

Basis for
valuation

Date

Whether
existing/
fresh

ii) First/Second/Third charge/Paripassu charge

Nature of
limits

Security

Value of block
assets as on:
(as per
B/Sheet)

Value of block
assets
excluding
specific charge
if any

Extent of
first /
second
charge
holders

(Rs. in Crore)
Balance / residual
value of charge
available to bank/
consortium

Term
Loan
Working
Capital
iii) Personal /Corporate Guarantee
Name of
Guarantor

Relationship
with
borrower

Net Worth
Prev.
As at
.

iv) Comments on changes, if any.

Present
As at .

Immovable property
Prev.
As at
.

Present
As at .

Date of
confidential report
Prev.

Present

v) Status of creation of charge:

8. C Security Margin ( Fixed Asset Coverage Ratio for term loans)

Existing
Nature

Book value

FACR

Book Value

Proposed
FACR on project
completion

Primary
Collateral
Total
9. Position of Account as on
Nature

Limit*

VS

DP

Balance

(Rs. in _____)
Irregularity

* To be reported strictly as per sanction. Any irregularity to be reported separately

10.A Conduct of the Account including details of terms & conditions not complied with.
Comments on following should be given
Availment of limit, overdrawings,
Routing of proportionate business in consortium, routing of sale proceeds, honouring of
commitment in non fund based facilities(details of LC/LG devolved/invoked with amount),
Regularity in submission of CMA data/ financial statement/QMS/Stock Statement.
The information regarding no. of cheques returned with amount involved due to financial
reasons during the review period should be mentioned.
The amount/frequency of irregularity in the account during the review period should be
mentioned.
10.B i) Value of the Account
Limit
Nature

Last year
Amount

Interest/
Commission

Yield(%)

(Rs. in _______)
Current year
Interest/
Yield(%)
Commission

Working capital (FB)

NFB
Term Loan
Bills
purchased/
collected
Any other
income
such
as
Escrow
account fee, etc.
Total
Details of other ancillary business such as opening of staff salary account/ availment of retail
lending schemes by staff members/opting of cash management system of the bank, etc.

10.B ii) Deposits including Escrow/TRA account with details

Current year
No. of A/c
Saving
Current
Escrow
Term deposit
Total
* Whether as

margin money

Amount *

Average balance

Last year
O/S

or free float

10.B (iii) Value of group accounts

10.C

Review of the Account and Summary of irregularities under zero tolerance

level and fraud sensitive index pointed out by Banks Inspectors, Concurrent
Auditors, Credit Audit & Review Division (CA&RD), RBI Inspectors, Statutory
Auditors, observations of Stock Audit Report, Comment on Preventive
Monitoring Score Trends, (and status of rectification of these irregularities)
As per Appendix III

10.D(i)

CONFIRMATION

1.

Compliance of last sanctioned terms

Yes/No

2.
3.
4.

Yes/No
Yes/No
Yes/No

5.

Security documents are valid/duly vetted/enforceable

Proper charge on securities created
Confirm that company/directors are not under bank/RBI/ECGC/
CIBIL defaulters/caution list
Confirm that payment of statutory liabilities is not in arrears

6.

Confirm that no litigation against/by the company is pending

Yes/No

7.

Corporate governance practices are being followed as per

Auditors report
Confirm that no deviations are made from usual norms/policy
guidelines
Confirm that Exposure is within banks internal ceilings/RBI
prudential norms

Yes/No

8.
9.

Yes/No

Yes/No
Yes/No

In case of No, details alongwith the reasons, justifications and action proposed should be
furnished.
10.D(ii) AUDIT/INSPECTION/MEETINGS

a)
b)
c)
d)

Particulars
Annual inspection
Stock audit
Consortium meeting
Closure of IR

Last date

Remarks/Observations/Steps taken

Indicative list of pre-disbursement conditions

Lead bank/processing/upfront/syndication/documentation
recovered prior to disbursement.

fee

etc.

Authorised capital/paid up capital to be raised to at least Rs....................

which should be supported by resolution passed by the company/certificate from
the companys CA/stamped undertaking from the company.

Unsecured loans to be raised to Rs................. before release of facilities and

supported by the companys CA/stamped undertaking from the company.

Total term loan and working capital requirements to be tied up fully before
release of limits.

The company to execute necessary security/renewal documents duly supported

by Board resolution and to get the charge registered within the time limit.

In case of sharing of securities on pari passu basis, the disbursement shall be

made after receipt of pari passu letter/execution of interest agreement with the
nd
other lenders. In case of creation of 2 charge, stamped letter from the first
nd
charge holder confirming 2 charge favouring our bank should be obtained for
release of limits for which suitable stamped undertaking to be obtained from the
borrower.

All
statutory
approvals/NOCs
applicable/related
to
business/activity should be submitted before release of funds.

Disbursement of Term Loan to be made subject to the promoters bringing in

their contribution strictly as per terms of sanction.

Sanction of any credit facility to the borrower outside the consortium

arrangement should be duly informed to the consortium members.

A stamped undertaking to be submitted in favour of the bank to the following

effect that during the currency of banks credit facilities, the company/firm shall
not without our permission in writing:

the

to

be

project/

Effect any adverse changes in companys/firms capital structure.

Formulate any scheme of amalgamation or merger or reconstruction.
Implement any scheme of expansion on diversification or capital expenditure
except normal replacements indicated in funds flow statement submitted to
and approved by the bank.
Enter into any borrowing or non borrowing arrangements either secured or
unsecured with any other bank, Financial Institution, company, firm or
otherwise or accept deposits in excess of the limits laid down by Reserve
Bank of India.
Invest by way of share capital or lent or advance funds to or place deposits
with
any
other
company/firm,
concern
including
group

companies/associates/persons. Normal trade credit or security deposit in

the normal course of business or advance to employees can, however, be
extended.
Undertake
guarantee
obligations
on
behalf
of
any
other
company/firm/person.
Declare dividend for any year except out of profits relating to that year after
meeting all the financial commitments to the bank and making all due and
necessary provisions.
Make any drastic change(s) in the management set up.
Approach capital market for mobilising additional resources either in the
form of debts or equity.
Sell or dispose off or create security or encumbrances on the assets charged
to the bank in favour of any other bank, Financial Institutions, company,
firm, individual.
Repay moneys brought in by the promoters, partners, directors, share
holders, their relatives and friends in the business of the company/firm by
way of deposits/loans/share application money etc.
Avail credit facilities/loan from outside the bank/consortium arrangement
without their knowledge and permission.

The release of credit facilities is also subject to:

Vetting of security documents by the banks approved advocate and banks
internal procedure of Credit Audit. The charges for vetting of documents by
the banks advocate are payable by firm/company.
*************